I am going to play devil’s advocate here. WHAT IF… credit cards were good? So often we hear all the bad and dangers about credit cards. Today, lets focus on the GOOD associated with credit cards and the reasons you should be using them, responsibly.
1. Credit Cards Establish Credit History
There are many ways you can create credit history, but the easiest is definitely by using credit cards. For ten years, our goal in marriage was to get completely out of debt and we accomplished this at the 10 year mark- yay us! We were debt free (minus the mortgate) and we were so excited! We didn’t have any other debt. In fact, I didn’t even own a credit card. I am so responsible! Long story short, after applying for a store credit card for an enormous discount on school clothes, I was given a $200 dollar limit, which was just insulting. I was shocked and a little confused. I should have stellar credit! The truth, is that I had NO credit. My name wasn’t on most of our previous loans, to make financing simpler. So we applied for a skymiles credit card and started using it in our everyday life. All the bills were automatically charged on the card and I pay it off monthly. My credit score has dramatically increased and I am establishing a credit history, which will make other financing or other things a little easier.
In order to qualify for a home loan, or other financing, you will need a credit history to get approved. Credit history is different from your credit score because it shows how long you have had credit, and whether or not you are using it. So, the best way to create a credit history is by using your credit cards and then paying them off each month before you acquire interest.
If you don’t have a credit card, it can make life a little tougher. You can’t even reserve a rental car without a valid credit card (yes, some will take debit cards.) If you have a credit card, you can use it to pay all of your bills, set up automatic payments, etc. I am weary of having automatic payments charge my debit cards. I have had companies maker errors and take out more money than expected, and it can really mess you up if the money comes out of your checking account when you aren’t expecting it. I like to be able to review my charges and be sure everything looks right and then pay my statement.
Using a credit card for all of your purchases makes paying bills so easy and great! Each month, you check your statement, review your purchases and pay your statement, and you are all done! This is a method you should only use if you are very disciplined and do not spend more than you have budgeted each month. If you aren’t careful, you can find yourself with a balance. Only do this if you spend less than you make and are good at keeping your expenses less than your income. It can get away from you pretty quickly, if you don’t pay attention and spend like a sailor, only to find that you are short at the end of the month.
And if you can do this, congratulations. This shows great self-control and responsibility.
3. Improves Your Credit Score
When you have and use a credit card, it will help you raise your credit score. As long as you are careful and pay your bill each month on time and are careful not to be late, your credit score will improve. Also, if you keep your balance below 50% of your credit limit, and pay regularly, you will have a higher credit score than if you didn’t have or use a credit card at all. As I mentioned above, it is important to have some sort of credit history. Don’t let your cards sit dormant. Use them, pay them off and keep them active. Be careful not to apply for a million cards, hoping to improve things “quicker.” Each time you apply for a credit card or loan, your credit takes a small hit. So be thoughtful in which cards or loans you apply for.
4. Credit Card Rewards
Yes, yes and yes!! I can’t believe I missed out on credit card rewards for most of my life. About a year ago, I got a Capital One rewards card. I put absolutely every expense we have on my new rewards card, and we will be able to take my family of 6 on a pretty great vacation next summer, using only our rewards. If you are spending money anyway, you might as well get paid for it. I have all of my monthly bills, excluding my mortgage automatically charged to my Capital One rewards card and I get 2 points for every dollar that I spend. School shopping, Christmas gifts, and oh so many medical bills the past year. My only regret is not having done it sooner. If you are wondering what the best credit card rewards program is, you can see my summary of the different offers here.
Be sure to read all terms and conditions and use the card the way it is intended. If you rack up a balance and pay lots of $$ each month in interest, it isn’t really worth it. I only use my card for the purchases I make each month anyway, and then I pay it off on payday each month. That way, I pay no interest but I get the rewards. It is perfect for someone that is disciplined enough to spend that way and budget to be sure the money is there to pay off when the statement arrives.
Remember I am not discrediting the warnings against using credit cards. They are a common pitfall for acquiring unnecessary debt. If you can be financially responsible and use credit cards in a positive way, they can benefit you in many ways.